Kettle Chip Co Pty Ltd v Apand Pty Ltd (No 2)

[1998] FCA 586

FEDERAL COURT OF AUSTRALIA

ACCOUNT OF PROFITS     )

PASSING OFF  ) - whether deductions should be made for fixed costs as well as variable costs in taking an account of profits - effect of finding that, if there had been no passing off, a smaller percentage of fixed costs would have been recouped - whether such a finding reveals a relevant profit - onus on respondents to show a reasonably acceptable basis of allocation - meaning, in respect of overheads, of “attributable to the manufacture and sale of the infringing product” - discussion of the nature and significance of opportunity cost - 30% of allocated fixed costs allowed on the basis that the opportunity forgone would not have recouped more than that percentage of those costs - where the business involving passing off was sold, whether an account of profits should include capital profits realized by the sale - nature of the remedy of account of profits - requirement to account for “such advantage” as the infringer may have derived - unjust enrichment - onus where capital profit includes value of legitimate businesses - trademarks, goodwill - whether respondents entitled to an allowance for pre-existing goodwill contributed to the infringing business - whether interest should be allowed on the principles on which an account is taken, or under s 51A of the Federal Court of Australia Act - when interest should run from and appropriate rate.

PRECEDENT - discussion of application of doctrine where there is no controlling authority.

Federal Court of Australia Act 1976, s 51A

The Kettle Chip Company Pty Limited v Apand Pty Limited (1993) 46 FCR 152 applied
Apand Pty Limited v The Kettle Chip Company Pty Limited (1994) 52 FCR 474 applied
Australian Woollen Mills Limited v F. S. Walton & Co Ltd (1937) 58 CLR 641 referred to
Dart Industries Inc. v The Decor Corporation Pty Ltd (1993) 179 CLR 101 applied
Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 applied
Schnadig Corporation v Gaines Manufacturing Company, Inc (1980) 620 F 2d 1166 applied
Cartier v Carlile (1862) 31 Beav 292; 54 ER 1151 applied
Re Yamashita (1946) 327 US 1 dictum applied
Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 dictum applied
Potton Limited v Yorkclose Limited [1990] FSR 11 applied
Baltic Shipping Company v Dillon (1993) 176 CLR 344 referred to
Duplate Corporation v Triplex Safety Glass Co. (1936) 298 US 448 applied
Business Trends Analysts, Inc. v The Freedonia Group, Inc. (1988) 700 F Supp 1213 referred to
Commonwealth of Australia v SCI Operations Pty Ltd (1998) 152 ALR 624 dictum applied
Warman International Limited v Dwyer (1995) 182 CLR 544 dictum applied
Namol Pty Limited v A W Baulderstone Pty Limited (No 2) (1993) 47 FCR 388 applied
Alec Finlayson Pty Limited v Armidale City Council (unreported, Burchett J, 6 March 1998) applied
Nagy v Masters Dairy Ltd (1997) 150 ALR 301 applied

THE KETTLE CHIP COMPANY PTY LIMITED (NOW KNOWN AS ACN 003 655 132 PTY LIMITED) v APAND PTY LIMITED (FORMERLY CCA SNACK FOODS PTY LIMITED) & ANOR

NG 248 of 1992
NG 906 of 1995

Burchett J
Sydney
2 June 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 248 of 1992 NG 906 of 1995

BETWEEN:

THE KETTLE CHIP COMPANY PTY LIMITED (NOW KNOWN AS ACN 003 655 132 PTY LIMITED)
Applicant

AND:

AND BETWEEN:

APAND PTY LIMITED (FORMERLY CCA SNACK FOODS PTY LIMITED)
Respondent

THE KETTLE CHIP COMPANY PTY LIMITED (NOW KNOWN AS ACN 003 655 132 PTY LIMITED)
Applicant

ASSOCIATED PRODUCTS & DISTRIBUTION PTY LIMITED
Respondent

JUDGE:

BURCHETT J

DATE OF ORDER:

2 JUNE 1998

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

The applicant bring in, on a date to be fixed, short minutes of orders appropriate to be   made pursuant to the reasons of the Court.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 248 of 1992 NG 906 of 1995

BETWEEN:

THE KETTLE CHIP COMPANY PTY LIMITED (NOW KNOWN AS ACN 003 655 132 PTY LIMITED)
Applicant

AND:

AND BETWEEN:

AND:

APAND PTY LIMITED (FORMERLY CCA SNACK FOODS PTY LIMITED)
Respondent

THE KETTLE CHIP COMPANY PTY LIMITED (NOW KNOWN AS ACN 003 655 132 PTY LIMITED)
Applicant

ASSOCIATED PRODUCTS & DISTRIBUTION PTY LIMITED
Respondent

JUDGE:	BURCHETT J
DATE:	2 JUNE 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

These two matters, which were heard together, raised several novel questions concerning the taking of an account of profits for passing off.  The circumstances that led to findings of passing off, and to the original order for the taking of an account of profits against the respondent Apand Pty Limited, are detailed in my reported judgment against that respondent:  The Kettle Chip Company Pty Limited v Apand Pty Limited (1993) 46 FCR 152, a judgment afterwards affirmed on appeal, subject to some variation: Apand Pty Limited v The Kettle Chip Company Pty Limited (1994) 52 FCR 474. The second action was launched subsequently, when the applicant became aware of the involvement of the respondent to that action, a company associated with Apand Pty Limited, which has accepted its liability as a joint tortfeasor for the same passing off.

For a full understanding of the nature and genesis of the special problems in these matters, it would be necessary to refer to my earlier reasons, and to those of the Full Court.  However, it will be convenient to set out here some salient facts.  At all relevant times up to 4 January 1993, Apand Pty Limited (“Smith’s”) conducted a snack foods business which included the well known “Smith’s” brand of potato chips.  The business of Smith’s had been long established, and it was by far the largest supplier of potato chips in Australia.  In December 1989, the applicant began selling, in a selected segment of the market, a potato chip of a notably different flavour and texture, using distinctive packaging and the word “Kettle” as a brand name.  Potato chips had not previously been known in Australia by that name.  The applicant’s venture was a huge success.  Within about two years, and from a standing start, it had taken 5% of the market.  Smith’s reacted in two ways.  It launched a new product, “Smith’s Classic”, as a short-term measure, and it commenced planning another new product for the longer term, intended to be closely similar to the applicant’s Kettle chips.  Smith’s new product for the longer term precipitated the present proceedings.  It came onto the market on 1 May 1992, promoted by a large advertising budget, under the name “Country Kettle”, growing rapidly during the eight months to 4 January 1993, when the entire snack food business was sold to a multi-national company, United Biscuits (Holdings) Plc. (“United Biscuits”).  But the name and packaging of Country Kettle involved, I held, passing off, and the orders for the taking of accounts now pursued were made by me accordingly.

Upon the taking of the accounts, a question arises as to whether, in the account brought in by Apand Pty Limited, any profit is shown for that period of eight months, and if so the amount of it.  Further questions arise as to whether, upon the sale of the snack food business to United Biscuits, capital profits were received by the respondents in respect of the “Country Kettle” trademarks and goodwill, and, if so, whether any amount in respect of those receipts represents profit for which the respondents must account to the applicant.  There are also questions with respect to interest, and the possible impact of income tax and capital gains tax.

Trading Profit/Loss
Apand Pty Limited brought in an account according to which it suffered a net loss in respect of Country Kettle of $1,094,000.00.  In the course of the hearing, some adjustments were made to the figures, affecting the precise amount of the loss, but the respondents’ case remained that the sale of potato chips under the brand name Country Kettle had not been profitable, but on the contrary had produced a substantial loss.  The figures which were said to support this conclusion allowed allocated amounts in respect of general finance and administration and other fixed costs of the company.  Allocation of each item of fixed costs was said to be based on the most appropriate measure, for example, the percentage of Country Kettle sales to total product sales, being 3.88%.  It is the question whether the deductions made in respect of fixed costs, as distinct from variable costs, were allowable which was the principal topic of debate in relation to the account (leaving aside the question of capital profit, which was dealt with separately).  Mr M Bryant of Arthur Andersen, accountants, the very impressive expert called on behalf of the applicant, contended that “the amount by which Apand Pty Limited was better off, measured as the actual trading profit after income tax but before deducting fixed costs, was at least $2,251,000”.  If, however, a proportion of fixed costs should be attributed to Country Kettle because, had it not been produced, an alternative product would have been, Mr Bryant argued for an assessment of the contribution the alternative product would have made to those fixed costs as required for “determining the extent to which an infringer is better off through selling one product rather than another”.  If the alternative product would have recovered a much smaller percentage of fixed costs than the infringing product actually recovered, it would be unfair to the injured party to allow the infringer to deduct the full amount of an allocation of fixed costs calculated proportionately to sales, or on any similar basis.  The infringer would thereby benefit from his own wrongdoing.

In the present case, the Court is not without some guidance concerning the contribution that might have been made by an alternative product.  Smith’s Classic, which was designed to compete with the applicant’s Kettle chips pending the launch of Country Kettle, was faded out as Country Kettle was introduced.  In the absence of Country Kettle, Smith’s Classic would doubtless have continued to be sold.  During a somewhat longer, but comparable, period, its sales were at an average rate of about 23% of that achieved by Country Kettle.  It is true that, had it continued to be sold instead of Country Kettle, or had a product resembling it been launched, the advertising effort that was put into Country Kettle might possibly have been put into the alternative product, with some effect on sales.  But Smith’s Classic does not seem to have been successful, and a product that was not passed off as associated with the applicant’s extremely successful Kettle chips would have been likely to have suffered two disadvantages.  It would have been slower to make an impact on the market in which Kettle chips were, to put it colloquially, “the flavour of the month”; and any impact it made, being less clearly focussed on the segment already occupied by Kettle chips, would have been likely to have been at the expense of the other brands in the market generally, and thus of Smith’s itself as by far the largest seller in the market.  The detriment to Smith’s which I have hypothesized was in fact the subject of a considerable amount of evidence.  It is a well known phenomenon in marketing called “cannibalisation”.  The reality of these considerations is confirmed by the very fact that Smith’s chose to take the risky course of marketing Country Kettle in the way that it did:  cf. the observation made by Evatt J in Australian Woollen Mills Limited v F S Walton & Co Ltd (1937) 58 CLR 641 at 668 to which I referred in my earlier judgment at 162, and see the comments I there made. Furthermore, there is always the question whether a less successful product would actually have received, and could in the time have recouped, the expensive advertising that was devoted to Country Kettle. Of course, to the extent that Country Kettle itself replaced other Smith’s products, that is, to the extent that its sale involved cannibalisation, Smith’s lost the opportunity of selling those other products. But the evidence satisfies me that Country Kettle was clearly focussed on the segment of the market occupied by Kettle chips, so as to minimize cannibalisation; and I am also satisfied that a proportion of any sales lost would have been lost to the growing popularity of Kettle chips, had Country Kettle not won them.  Mr Reeves, a key figure in Smith’s, said in evidence “it was the principal activity of [Country Kettle] to target a particular group of users that were being appealed to by these Kettle-style products”.

It is clear law that “the onus is on the defendant to establish that any item of costs was incurred in relation to the manufacture of the infringing articles” and “to provide a reasonably acceptable basis for allocation”:  Dart Industries Inc. v The Decor Corporation Pty Ltd (1993) 179 CLR 101 at 118. If the ascertainment of allocated amounts of fixed overheads required a conclusion as to whether the probable alternative product would have enabled the same proportion or some particular proportion of overheads allocated in accordance with sales to be recovered, I am not satisfied that the alternative product here would have enabled the recovery of a significantly higher proportion of such overheads during the relatively short period of eight months which is in question than was recovered by Smith’s Classic during the period it was marketed. But the legal problem to be faced is whether, in the circumstances, a conclusion of fact on that matter is required.

The leading authority in Australia concerning the deductibility of allocated amounts in respect of fixed costs upon the taking of an account of profits is the decision of the High Court in Dart Industries Inc v The Decor Corporation Pty Ltd, which affirmed, subject to a variation the effect of which was much debated before me, the decision of a full court of the Federal Court in Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397. It is necessary to examine these decisions in some detail. The parties argued for very different interpretations of them. For the applicant, it was said that the High Court, contrary to the approach of the Federal Court, had espoused a view which limited the allowance of proportionate allocations of fixed costs to those which were attributable to the infringing product in the sense that the expenditure in question was affected by the sale of the product.  Counsel for the respondents, on the other hand, argued that the decision of the High Court did not differ materially from that of the Federal Court; both, they said, authorized the deduction of proportionate allocations of fixed overheads that had contributed to or assisted in the production, save in particular circumstances which the judgments identified.

In Decor Corporation v Dart Industries Inc at 405-406, the joint judgment of the full court of the Federal Court (Sheppard, Burchett and Heerey JJ) stated:

“In our opinion, the correct answer is to be obtained by keeping firmly in view the object of an accounting for profits.  That object is not to punish the defendant, but it is to ensure that he disgorges, and the plaintiff receives, an amount which truly represents the profit obtained by the infringement.  ...  [I]tems such as rent, salaries of administrators, and depreciation, which are attributable to a range of products including an infringing product, because they make a contribution to the exploitation of all those products in the business, should be apportioned, and an appropriate apportionment allocated to the expenses of the infringing product.”

(I have emphasized in this passage the words “attributable” and “contribution” which, as counsel for the respondents pointed out, show that the Federal Court saw the making of a contribution as the ground on which fixed costs might be held attributable to a particular manufacture.  The majority of the High Court, he claimed, simply acted on this view when it varied the order made in the manner which will appear.)

The matter having reached the High Court, the joint majority judgment (Mason CJ, Deane, Dawson and Toohey JJ) concluded (at 119-120):

“Whether Decor and Rian should succeed in their contentions depends upon whether, as a matter of fact and substance, the overheads which they seek to have deducted are attributable to the manufacture and sale of the infringing product.  In arriving at an answer, the Court must consider such questions as whether the overheads in any particular category were increased by the manufacture or sale of the product, whether they represent costs which would have been reduced or would have been incurred in any event, and whether they were surplus capacity or would, in the absence of the infringing product, have been used in the manufacture or sale of other products.  Dealing with the last of these questions may require the use of the concept of opportunity cost.  If any of the categories are to be brought into account, the proportion to be allocated to the infringing product must be determined and it is here that approximation rather than precision may be necessary.  ... 

It follows that we consider ... that the Full Court was substantially correct in directing, as it did, that ‘the appellants are at liberty to show that various categories of overhead contributed to the obtaining of the relevant profit, and to show how and in what proportion they should be allocated in the taking of the account of profits’.  But it would be better, we think, if the word ‘contributed’ were replaced by the words ‘are attributable’.”

The reference to opportunity cost in this passage is of significance.  Their Honours had earlier explained (at 114) that the opportunity cost of a product is “the cost of forgoing the profit from the manufacture and marketing of alternative products”.  If a wrongdoer ordered to account for his profits made by producing a product which he passed off as someone else’s would, had he not engaged in the production of the product passed off, have produced an alternative product yielding 90% of the profit that was actually earned, then it could be said that an opportunity cost was incurred being the 90% profit forgone.  But, as a matter of law, a wrongdoer is not permitted to deduct such a profit as against the innocent party:  Dart Industries Inc v Decor Corporation Pty Ltd at 114.  However, at the same page, it was held in the joint judgment of the majority of the High Court that, in such a case, “there would be real inequity” if the wrongdoer were denied both the opportunity cost and also “a deduction for the cost of the overheads which sustained the capacity that would have been utilized by an alternative product and that was in fact utilized by the infringing product”.  It follows from this way of putting the matter that the ground of the allowance of these overheads (the question only arises in the case of fixed overheads, since there is no dispute that the appropriate amount of variable overheads must be allowed) involves a matching of the contribution made by the particular overheads to the manufacture of the infringing product with the contribution that the same overheads would have made to the manufacture of the alternative.  The logic is that, since the infringing product did not cause any increase in these fixed overheads, no part of it is an expense except upon the opportunity cost principle, which allows it only because the manufacture of the infringing product has involved the forgoing of the opportunity to recoup this expenditure.  As the majority of the High Court go on to point out (also at 114), if an infringer were permitted to deduct a part of fixed overheads in a case where no alternative product would have recouped any part of those overheads, “the defendant would be in a better position than it would have been in if it had not infringed”, which should not be permitted.  In such a case, “[i]t is not relevant that the product could not have been manufactured and sold without these overheads”.  For the defendant should account for the whole profit, and part of the profit was the partial recoupment of fixed overheads which would not otherwise have occurred.

In Dart Industries Inc v Decor Corporation Pty Ltd, no suggestion was made that the alternative product would have been much less successful than the infringing product.  But where such a suggestion is made, and appears to be justified, the logic of the position expounded by the majority of the High Court seems to demand some elaboration of the simple propositions to which I have referred.  The question before the High Court did not require their Honours to go into the detail of the range of complexities that might be encountered in practice.  But they were not unaware of those complexities, and the proposition they laid down, it seems to me, made deliberate allowance for the kaleidoscope of differing circumstances which might be found to exist.  Their Honours quoted (at 114) the statement of the United States Court of Appeals, Sixth Circuit, in Schnadig Corporation v Gaines Manufacturing Company, Inc (1980) 620 F 2d 1166 at 1175:

“The alternative available uses of the facilities devoted to the infringement must be considered, and these too will vary.”

In Schnadig Corporation, at the page cited, this variation is ascribed to “the infinite variety of fact patterns which may arise” so that “a rigid rule dictating the treatment of fixed expenses would hamper rather than aid the lower courts” in achieving the goal of ensuring that the innocent party “recover every dollar of advantage realized by the infringer from the infringement”.  In fact, in Schnadig Corporation, the ruling that was upheld allowed (as also appears at 1175) “approximately two-thirds of the fixed costs allocable to the infringing production” to be deducted. When, therefore, the majority of the High Court, having cited Schnadig Corporation  for the proposition that the alternative utilization involved will vary from case to case, proceeded on the same page of their joint judgment to state the rule as governing what “will ordinarily be appropriate”, there is no reason to doubt they envisaged that in some cases a proportion, such as the two-thirds actually allowed in Schnadig Corporation, might be appropriate.  What their Honours said was:

“Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity” (emphasis added).

That the rule is not rigid is shown, not only by the citation with apparent approval of Schnadig Corporation and the use of the word “ordinarily” in the passage I have cited, but also by other aspects of the majority judgment in Dart Industries Inc v Decor Corporation Pty Ltd.  Their Honours said (at 117):

“... that in some cases profit can only be properly assessed by deducting a proportion of at least some of the overheads, including fixed costs.  The overheads, if any, to be deducted and the basis of apportionment will depend upon the facts of each case, bearing in mind always that the aim of the exercise is to arrive as closely as possible at the true profit.

The basis of apportionment may vary from case to case.”

This appears quite explicitly to authorize the Court to examine the circumstances in evidence, with a view to the selection of the most appropriate “basis of apportionment”.  In doing so in the present case, I may (as was stated at 119) “use ... the concept of opportunity cost”, which tells me that in fact Smith’s did not forgo an opportunity of recouping the full proportion of fixed costs recouped by Country Kettle, but only something of the order of 23% of that proportion.  (Of course, I am not speaking of actual sums paid, but of allocations in accordance with accounting principles designed to represent, as fairly as possible, the true cost of business operations in respects that did not involve discrete, identifiable payments.)  When considering whether I should reflect in my decision the paucity of the opportunity forgone, the majority judgment instructs me (at 116) that “the guiding principle ... is that an account of profits aims to have the defendant account for the actual profit, no more and no less, which it has gained from the infringement.”  If Smith’s does not account for so much of the fixed costs recouped by Country Kettle as would not have been recouped by an alternative product, then, to that extent, it will not have accounted for the actual profit gained from the infringement.  As I have already pointed out, the earlier passage in the majority judgment (at 114), speaking specifically of the allowance of overheads on the basis of a forgone opportunity to recover them, relies on the proposition that the infringer should not be permitted to be in a better position than if there had been no infringement. 

Counsel for the respondents leaned heavily on the judgment of McHugh J in Dart Industries Inc v Decor Corporation Pty Ltd (at 125-126) in seeking support for the proposition that fixed costs ought to be allowed, on the taking of an account in respect of the production of a particular product, whether or not an alternative product would have recouped some or all of the amount of fixed costs allocated in the account.  But, with respect, this opinion of McHugh J cannot prevail over the joint majority judgment.  And it is noteworthy that his Honour expressed (at 132 and 135) views about the role of the concept of opportunity cost quite different from those expressed by his colleagues.

I conclude that, on the facts of this case, the amounts of the allocated proportionate deductions of fixed costs claimed in Smith’s account should be reduced to 30% of those amounts.  That percentage reflects an allowance - not large, for reasons already given - for the extent to which Smith’s Classic, or an alternative product, might have improved, during the relevant part of 1992, upon the previous performance of Smith’s Classic, had Country Kettle not been launched on the market.  On the basis of a reduction to 23% (the percentage of the sales of Country Kettle actually achieved by Smith’s Classic), it was not ultimately contested that Country Kettle showed a trading profit before tax of $1,054,000.00 for the period to 4 January 1993.  The figures will need to be adjusted in the light of my conclusion.

Capital Profit
The first question to be asked about the applicant’s claim to include in the account items of capital profit, in respect of the Country Kettle trademarks and goodwill, is whether the law allows such a claim.  No precedent for it was cited, but at the same time no precedent denying it was cited either.  This is less remarkable than it appears, because nearly always, when an account of profits is ordered, an injunction will also issue terminating the infringing business, so that there will be no capital profit to account for - indeed, in Cartier v Carlile (1862) 31 Beav 292 at 298; 54 ER 1151 at 1153, Sir John Romilly MR said “the liability to account for the profits is incident to the injunction”. Cf. Meagher, Gummow and Lehane, Equity Doctrines and Remedies (3rd ed, 1992) 662.  Here, unusually, the business of Smith’s, including Country Kettle, was sold during the pendency of the proceeding, so as to realize, as the applicant claims, a capital profit.

In the Anglo-Australian legal system, the doctrine of precedent aims to ensure consistent, principled and practical development of the law by requiring courts to accept guidance from earlier decisions.  In turn, new judgments become precedents for the future.  The concept is actually much older than the Common Law.  According to Tacitus, the Emperor Claudius, addressing the Senate of Rome on the historic admission of senators from Gaul, declared:  “What we are today justifying by precedents, will be itself a precedent”:  Tacitus, Annals, Book XI sec 24.  But the doctrine is not merely mechanical.  It is the principle of a judgment that counts, and may later be used in the law’s constant search for solutions to new problems.  By extension of the relevant principles in the authorities, the answer must be sought to the question, as yet undecided, whether a capital profit is bound to be surrendered in a case of this nature.  Rutledge J, “[un]able to find precedent” for the proceeding, said in Re Yamashita (1946) 327 US 1 at 43: “Precedent is not all-controlling in law. There must be room for growth, since every precedent has an origin. But it is the essence of our tradition for judges, when they stand at the end of the marked way, to go forward with caution keeping sight, so far as they are able, upon the great landmarks left behind and the direction they point ahead.”

It seems to me that the landmarks in the cases on accounting for the profits of passing off and of various activities infringing the rights of others point in the direction claimed by the applicant.  The fundamental principle upon which an account is taken is that “it is inequitable that [the wrongdoer’s] estate should receive the benefit and profits of the property of another person”:  Story, Commentaries on Equity Jurisprudence as Administered in England and America, s 513, cited by the Federal Court in Decor Corporation Pty Ltd v Dart Industries Inc at 400.  This principle does not suggest any distinction which would deny a capital profit the character of a relevant benefit.  Nor did Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32, also cited by the Federal Court at the same page, make any technical distinction when he said in broad terms that “the infringer is required to give up his ill-gotten gains to the party whose rights he has infringed”. Sir John Romilly MR, too, used what I think must have been deliberately wide language when he said in Cartier v Carlile at 298; 1153 that equity will make one who infringes a trademark “account for such advantage, if any, as he may have derived from its user”. This statement was quoted by Millett J (as he then was) in Potton Limited v Yorkclose Limited [1990] FSR 11 at 15. His Lordship added:

“The remedy is given in order to prevent the unjust enrichment of the defendant.”

Both statements were cited by the Federal Court in Decor Corporation Pty Ltd v Dart Industries Inc at 401. The proposition that the object is to prevent an infringer’s unjust enrichment is confirmed by the judgments in the High Court in Dart Industries Inc v The Decor Corporation Pty Ltd at 111, 114-115, (in the joint judgment) and 123 (McHugh J).  McHugh J echoes the language of Windeyer J when he uses the phrase “to make the infringer give up its gains in order to prevent its unjust enrichment”, while the joint judgment points out that unjust enrichment is concerned with “matters of substance”, citing Baltic Shipping Company v Dillon (1993) 176 CLR 344 at 376, per Deane and Dawson JJ.

In Duplate Corporation v Triplex Safety Glass Co. (1936) 298 US 448, one infringer had supplied special glass to the other for use in the fabrication of the infringing product. There was no other market for the particular glass supplied. Cardozo J, delivering the judgment of the Supreme Court of the United States, said (at 456):

“In the computation of the profits allowance has been made for the material so furnished on the basis of manufacturing cost.  The defendants now insist that the basis should be market value.  The acceptance of such a measure would enable the infringers to profit by their wrong.  There was no use in the automobile industry for glass so thin as this except in connection with the process described in the complainant’s patent.

...

If as part of this accounting it is given credit for the glass at a price above the cost, it will thereby have enlarged its market to an equivalent extent and reaped a profit as infringer.  Equity forbids that this result should be attained.”

Duplate Corporation did not involve the question whether the defendants should account for a capital profit.  But the reasoning of Cardozo J is applicable to the problem here.  If the respondents are not required to account for any capital profit that arose out of the disposal of the trademarks and goodwill of Country Kettle, they will have strengthened the business of Smith’s “and reaped a profit as infringer[s].”  As Cardozo J said, equity forbids that this result should be attained.  In forbidding it, equity’s concern is not with the nature of the profit, but with the fact of the profit.

The defendants in Potton Limited v Yorkclose Limited had infringed the plaintiff’s copyright in building plans by constructing a number of houses. A question argued was whether a liability to account for an unrealized profit arose upon the construction of the houses and before their sale. Millett J, having quoted the ruling of Sir John Romilly MR which has been referred to, continued (at 15-16):

“Those are wide words and I do not see why they should exclude unrealised profits.  The remedy is given in order to prevent the unjust enrichment of the defendant.  The making of a real though unrealised profit by the unauthorised use of another’s intellectual property is plainly an advantage which is capable of resulting in unjust enrichment.  A builder who builds a house in infringement of copyright is unjustly enriched whether he builds it for sale or for his own use and occupation.  The reason why the question appears not to have arisen for decision before is that where goods or other articles are produced in infringement of copyright the plaintiff is entitled to conversion damages and delivery up of unsold copies.  A house, however, is part of the realty, and cannot be the subject of conversion or an order for delivery up.  Unless the plaintiff is entitled to an account of unrealised profits he may have no substantial remedy despite the enrichment of the defendant as a result of his wrongful use of the plaintiff’s property.”

In a copyright infringement case heard in the United States District Court, New York, by Conboy J, Business Trends Analysts, Inc. v The Freedonia Group, Inc. (1988) 700 F Supp 1213, infringing copies had been sold at a very low price in order to gain a market advantage. Conboy J added (at 1232) to the small cash profit obtained “gross good will profit and market advantage quantifiable at $49,950.00”. He said (at 1238) that “infringing profit may be broader than mere cash profit”, and he concluded (at 1239) “that all profits, cash or non-cash, that are attributable to the infringement, and are not remote or speculative, are recoverable under the Act.” This case is cited in an interesting discussion in Nimmer on Copyright (1994) vol 3 para 14.03[A].

In my opinion, the distinction between capital and revenue profits is not of significance for the purposes of the taking of an account of profits in an action for passing off.  The account relates to all profit gained by the wrongful conduct in question.

The sale to United Biscuits, by which the applicant says a relevant capital profit was earned, was negotiated over most of the year 1992.  Early in that year, United Biscuits’ chief executive, a Mr Nicoli, spoke to Mr Dean Wills, the managing director of Coca-Cola Amatil Limited (“CCA”), which controlled Smith’s.  As a result of their conversation, an offer was made by United Biscuits in February to purchase the international snack foods business of CCA (in Australia, Europe, Asia and Papua New Guinea), including Smith’s, for a sum of A$423 million.  That offer was refused in April, but in July and again on 4 August 1992 meetings were held between senior executives of United Biscuits and CCA.  At the conclusion of the meeting of 4 August 1992, which took place in a hotel in Austria, Mr Nicoli said he was prepared to offer A$437.5 million, and Mr Wills said he was prepared to recommend this offer.  His recommendation (made on the basis that “[p]rovided a financial restructuring in Europe (presently being undertaken) is successful, the liability of CCA to Capital Gains Tax is expected to be nil or minimal”) was accepted by a board meeting of CCA on 7 August 1992.  Mr Wills then left the negotiation of the details of an agreement to others.  It seems clear that, up to this point, the bargaining had been concerned with a global price for a large business, not with the details of its component operations. 

Finalisation of the agreement took some time.  It was not executed until 10 November 1992, and the sale was not completed until 4 January 1993.  During the course of the further negotiations which occurred up to the time of the signing of the agreement, Mr John Ballard, the managing director of Smith’s, visited Mr Hearn, the managing director of a division of United Biscuits, in England.  Mr Ballard, although available, was not called to give evidence in relation to any question on the taking of the account.  Minutes of the meeting in which he was involved with Mr Hearn, held 1 and 2 September at Twickenham, contain a reference to “Outstanding Legal Issues - Kettle Chips & Bacterial Wilt”, but no details of what was said are given.  “Bacterial Wilt” refers to unrelated litigation.  On 21 October 1992, Mr Hearn wrote to Mr Gibson, the then deputy managing director of CCA, concerning “the current disappointing performance of the Australian business”.  This led to a review of the value of the assets involved, and of the decision to sell, as a result of which Mr Ihlein, the Group Treasurer of CCA, recorded a note in the following terms:

“We will not sell the business below $430M.”

At the time of finalising the agreement, the parties resolved the problem of the possibility of a further reduction in profit for 1992 by separate letter, dated 10 November 1992, signed by Mr Wills, which fixed a formula for assessing whether an adjustment of the price should be made, and by how much, in the event that “the aggregate profits of the snack foods business for the year ending 31st December 1992 ... are less than A$35 million (before interest and tax)”.  For several reasons, including the drop in performance of the business, the price ultimately agreed, subject to this possible adjustment, was not the $437.5 million originally negotiated, but $430 million.  That sum was apportioned “to give a true and fair value to the trademarks and goodwill”, as Mr Bruce Noble, the Group Financial Controller of CCA, informed the Court, $155,000,000 being allocated to the trademarks and $77,950,000 to goodwill.

On 14 October 1992, Mr Ian Carroll of Clayton Utz, the solicitor acting for CCA, had a telephone conversation with Mr Hegarty, the company solicitor of CCA, in which a query raised by a director of United Biscuits in connection with Country Kettle was discussed, and it was agreed that Mr John Ballard would advise Mr Clark of United Biscuits personally.  There was no evidence of what was said between them, but I am satisfied Mr Ballard did speak to Mr Clark.  Mr Carroll’s evidence was that on 14 October 1992 he had a telephone conversation with Mr Parsons of Mallesons, who was acting for United Biscuits, in which Mr Parsons said:

“Ian, are you able to find out for me the value of the Country Kettle business?  In particular, we are interested in knowing what are the revenue numbers for the business in case we have to pull out of it.”  (The action brought by the applicant had, of course, been disclosed at least as early as Mr Ballard’s meeting with Mr Hearn in England.) 

Mr Carroll replied:

“I’m not aware of those specific matters.  I’ll have to get instructions.  Perhaps John Ballard could discuss those matters with Mr Clark.”

On the same day, Mr Carroll telephoned Mr Hegarty, to whom he said:

“Mallesons have asked about the value of the Country Kettle business.  Could you please get some details on this point?”

Mr Hegarty replied:

“Sure.  It’s probably best though if John Ballard discusses these operational matters directly with Alistair Clark”.

Smith’s budget for 1992, which had been prepared in 1991, contained no budgeted figures for Country Kettle, but monthly management reports during 1992 included the earnings of Country Kettle in the figures they reported.  Having regard to the concern expressed by United Biscuits about a possible shortfall in earnings for 1992, I think it can be inferred that this information was communicated, if only in a summary form, to United Biscuits.  The failure of the respondents to call Mr Ballard, who was available, enables me the more confidently to reach that conclusion.  It would plainly have been of importance to United Biscuits to know these figures, as well as other figures, for the purposes of any reassessment of the value of the snack foods business, or for the purposes of any apportionment of that value. 

So far as the litigation is concerned, the evidence shows that CCA had been in receipt of confident advice, which it had passed on to United Biscuits.  No special term was inserted in the contract, and there is no evidence that the advice received was discounted.  Obviously, the pendency of litigation represented a factor that might have depreciated the value of Country Kettle, but by November the Country Kettle marketing venture was being seen at Smith’s as a success, and indeed, after the purchase by United Biscuits, it continued to be promoted and its progress continued to unfold until the decision in the litigation.  It involved a new product intended to have a vibrant image, and to have a revitalising effect on Smith’s brand going beyond one narrow category of potato chips, as the evidence of Mr Reeves, the Marketing Manager at the time, made clear.  For that reason, while the litigation must have had some depressing effect, the achievement and prospects of Country Kettle itself and its reflection on the image of the Smith’s brand generally must also have had a positive influence upon the valuation of the business.  For the value of a business, according to the evidence, at a given time, is very much influenced by the perception then held of the outlook for its future.  If, nevertheless, the depressing effect of the litigation was significant in its impact on the value attributed by the parties to Country Kettle, that would have been made clear at the meeting on 1 and 2 September, attended by Mr Ballard, at which the litigation was discussed, and subsequently when he spoke to Mr Clark.  The absence of Mr Ballard from the witness box enables me to draw the conclusions I have stated with regard to the effect of the action brought by the applicant, on balance, the more confidently:  Jones v Dunkel (1959) 101 CLR 298. In summary, at the time United Biscuits entered into the agreement, the considerations operating to enhance the value of Country Kettle at least balanced those operating to reduce its value.

Various considerations were urged against this view.  The respondents’ expert in accountancy, Dr Ferrier, considered “the unresolved litigation” should “reduce the value of Country Kettle”.  However, he qualified this opinion by the phrase “[i]n the absence of evidence of extraordinary sales growth for Country Kettle subsequent to 1993”.  Of course, sales growth was cut short by the decision of the Court towards the end of 1993.  But the principle of Dr Ferrier’s qualification is met by my conclusions in this case.  For I find the proper inference from the persistence of Smith’s before the sale of the business, and United Biscuits afterwards, in promoting Country Kettle right up to the delivery of the Court’s decision, and having regard to the evidence of Mr Reeves, is that extraordinary and continuing sales growth of Country Kettle was anticipated.  Certainly, large sums were spent on advertising and marketing to that end, and the rapid growth actually achieved both by Kettle chips and by Country Kettle would have supported the anticipation.  In October 1992, according to Mr Reeves, the Country Kettle product “was showing all the signs of success”, and he had “a belief that it was meeting its objectives and growing towards that” (that is, meeting the two objectives of winning sales in a particular segment of the market and injecting a feeling of “modernity and indulgence into [the] Smith’s [brand]” generally).

The respondents called evidence from a Mr David Andrew, managing director of a company Interbrand Pacific Pty Ltd, a subsidiary of a London based company the business of which involves valuing brands and the assessment of brand strength, who expressed the opinion that, because Country Kettle’s trading account showed “a net loss after tax for the 1992 year”, it could be concluded “on this basis alone the Country Kettle brand would in Interbrand’s terms demonstrate no value”.  But cross-examination revealed that statement to be worthless.  Mr Andrew was an unimpressive witness, and in any case, he conceded “our valuations are not done for purposes of establishing a market value”.  He conceded, too, that he was “not provided with any projections for the brand”, and that it was “not unusual for a new brand to demonstrate losses not just in year one but in year two and beyond for that matter”.

Counsel for the respondents also raised the following argument.  They said the newness of Country Kettle as at 4 August 1992, when the verbal deal was concluded in Austria between the managing director of CCA and the chief executive of United Biscuits, makes it impossible to conclude that any part of the global price of $437.5 million related to Country Kettle.  It was not then included in CCA’s  budget.  It had been, counsel said, “on sale for two months only”.  (This submission was exaggerated - Country Kettle was launched some three months before 4 August 1992.)  But the premise of the argument is false.  Although a verbal assent to the sale was given on 4 August 1992, or more accurately, was confirmed following the board meeting of 7 August, much negotiation followed, and a binding contract was entered into only on 10 November 1992.  By then, the global price had changed (to $430 million, subject to possible further downward adjustment pursuant to the letter of 10 November 1992), and there had been discussion between the parties about Smith’s performance, in which the Country Kettle earnings were included.  Perhaps uniquely among the Smith’s brands, attention had been focussed on Country Kettle, and specifically on “the value of the Country Kettle business”.  By October, that is the month when Mr Ballard was asked the question about value, Country Kettle, according to Mr Ballard’s Marketing Manager, Mr Reeves, was showing all the signs of success, and was contributing to Smith’s in the ways already stated.  The proper conclusion is that Mr Ballard said so, and that Country Kettle formed part of the total assets for which the new sum of $430 million was agreed to be paid.  The applications for the Country Kettle trademarks were expressly included in the agreement, just as its earnings were included in the profits represented to United Biscuits in respect of the total business.  The prospect that those profits would continue was the essential basis for the value attributed to the goodwill and trademarks of the business when the final price of $430 million was fixed.

Accordingly, I conclude that capital profits were received in respect of Country Kettle upon the sale which was settled on 4 January 1993.  The two sums of $155,000,000 and $77,950,000, for trademarks and goodwill respectively, included the trademarks and goodwill of Country Kettle.  Those trademarks involved the passing off in respect of which the account is being taken, and that goodwill was a product of the same passing off.  In my opinion, the capital profits so received must be accounted for to the applicant.  Since the respondents reaped these profits by a sale in which were intermingled legitimate capital profits with the capital profits of passing off, the Court is faced by a problem of disentanglement.  Mr Bryant and Dr Ferrier debated the merits of a number of different methods by which the appropriate figures relating to Country Kettle might be derived from the two sums of $155,000,000 and $77,950,000.  Although several other bases of calculation put forward by Mr Bryant would have yielded significantly higher figures, the applicant embraced in submissions a calculation which received some measure (it was not suggested a full measure) of endorsement from both Mr Bryant and Dr Ferrier.  The calculation assumed that a valuation of Country Kettle late in 1992 would have been made on the basis of the prospective earnings for 1993, having regard to the fact that Country Kettle was, on the one hand, very new, and on the other, showing all the signs of success.  On the further assumption that in late 1992 experienced businessmen would have predicted with reasonable accuracy the likely sales in 1993, the calculation takes the actual earnings of Country Kettle in that year and expresses them as a percentage of the earnings of Smith’s in that year.  The percentage is 2.4%.  This percentage of the sum of $155,000,000 is $3,720,000, and this percentage of $77,950,000 is $1,870,800, making a total of $5,590,800 as the proportion of the capital profits received which is attributable to Country Kettle.

In Decor Corporation Pty Ltd v Dart Industries Inc at 406, the joint judgment of the Full Court of the Federal Court states:

“Where a wrongdoer has mixed his legitimate business with activities involving infringement of someone else’s property right, on general principle the burden must be upon him to justify the particular basis of disentanglement he adopts in his accounts.  This principle was asserted by the Supreme Court of the United States in Westinghouse Electric & Manufacturing Co v Wagner Electric & Manufacturing Co 32 SCR 691 (1912) at 696 and again, in an opinion of the court delivered by Cardozo J in Duplate Corp v Triplex Safety Glass Co 298 US 448 (1936) at 458, where that learned judge said: ‘The wrongdoer bears the burden in cases of confusion.’”

Nothing in the judgment in the High Court in Dart Industries Inc v The Decor Corporation Pty Ltd departs from this principle.  The joint majority judgment concentrates, so far as onus is concerned, on the allocation of fixed costs, but, consistently with the general principle laid down by Cardozo J and adopted by the Federal Court, it states (at 118):

“The guiding principle would seem to be that the onus is on the infringer to provide a reasonably acceptable basis for allocation.”

Their Honours add that this view “is supported by the United States authorities and may also be justified because the relevant facts are likely to be peculiarly within the knowledge of the defendant.”

However, in the present case, I am positively satisfied that the basis on which the sum of $5,590,800 has been calculated is appropriate.  To the extent that it might be thought, despite the conclusions I have already reached, that some further allowance should be made for the risk of the litigation, the calculation does that by limiting the projection of profits to one year.  Having regard to the newness of Country Kettle and its comparative success among Smith’s brands in 1992, this is a significant allowance.  That it is so is confirmed by the fact that other calculations in evidence would yield considerably larger sums.

Some arguments raised for the respondents require to be noticed separately.  Counsel urged that “[f]actors other than name and get up contributed to the capital profit in so far as it applied to goodwill”.  The argument, as put, ignored the difficulty of the respondents’ onus to provide a satisfactory means of disentanglement, if it claimed to disentangle these elements.  But, more fundamentally, it founders on the same rock which destroyed similar arguments in Decor Corporation Pty Ltd v Dart Industries Inc and in Duplate Corporation v Triplex Safety Glass Co.  In the former case (at 407) the Federal Court dealt with a contention that “the defendants’ own pricing policy contributed to the success of the article”, so that not all the profit was to be attributed to the infringement.  In the joint judgment of the Court it was said:

“The last point can, we think, be quickly disposed of.  It was answered, many years ago, by Cardozo J in Duplate Corp v Triplex Safety Glass Co (supra) (at 457). That case concerned an infringement of a patent for the making of shatterproof laminated glass for use in automobiles. The infringer claimed that an allowance should be made for his exploitation, in producing the infringing glass, of patented devices of his own which contributed to the manufacture. Cardozo J said:

‘But this is to misconceive utterly the position of an infringer accounting for illicit profits.  “An infringer cannot be heard to say that his superior skill or intelligence enabled him to realise profits by his infringement which a person of less skill might not have realised.” ... He will be heard with no more patience in an endeavour to diminish liability by ascribing his profits to the capacity indwelling in a patent.  Whatever is at his call in the service of the enterprise - brawn and intelligence, factories and lands, patents and machinery - will be viewed upon an accounting as if held upon a quasi-trust to contribute what it can to the profits of the business.  The wrongdoer must yield the gains begotten of his wrong.’

This reasoning is entirely applicable to the present appellants’ attempt to press into the service of their case the alleged benefits of their pricing policy.”

In the High Court, the Full Court’s adoption of Cardozo J’s principle was not challenged.  In my opinion, the principle applies equally to the suggestion in the present case that the profit realized by the sale of the goodwill of Country Kettle was contributed to by the qualities and pre-existing goodwill associated with the name of Smith’s.  At the same time, as counsel for the applicant conceded, the applicant is not entitled to share in the proceeds of the expertise, goodwill and other qualities of Smith’s itself, but only in the proceeds of the goodwill associated with Country Kettle.

A more general argument urged for the respondents was that the capital profit was not “derived at the expense of the applicant”.  Since the purpose of an account is “to prevent [the defendant’s] unjust enrichment” (Dart Industries Inc v The Decor Corporation Pty Ltd at 111), and an essential element of an unjust enrichment is that it was “derived at the expense of a plaintiff” (Pavey & Matthews Proprietary Limited v Paul (1987) 162 CLR 221 at 257, per Deane J), counsel claimed the respondents could only be accountable for the capital profit if it could be shown to have been derived at the applicant’s expense. But, on my findings, this profit is the fruit of the infringing business which was intended to win consumers back from the applicant, and, I infer, in fact did so in some measure. It was gained at the applicant’s expense just as much as the trading profit was so gained.

Interest
For the applicant, it was contended that interest should be added to the amounts allowed, both in respect of trading profit and in respect of capital profit. The argument was that the respondents have had the use of the money, which is an advantage to be reflected upon the taking of an account of profits. Alternatively, reliance was placed on s 51A of the Federal Court of Australia Act 1976. The respondents disputed the applicant’s entitlement to have interest included in the account of profits, and complained that s 51A was not pleaded. As to the last point, I took the view that, if leave were necessary, it should be granted, no prejudice having been suggested.

The authorities to which I have already referred, when discussing the question of capital profits, state the principle upon which an account is taken in terms strongly suggesting that interest may be included.  Equity does not permit the wrongdoer to make a profit, by which he would be unjustly enriched, out of the infringement of a plaintiff’s rights.  Litigation takes time, and in most cases a defendant would have the benefit of any moneys obtained by an infringement for a substantial period.  For this reason, it seems to me that interest should generally be allowed.  That conclusion accords with the statement made by McHugh and Gummow JJ in their joint judgment in Commonwealth of Australia v SCI Operations Pty Ltd (1998) 152 ALR 624 at 645:

“An account of profits would carry interest.”

Their Honours referred, as authority, to Warman International Limited v Dwyer (1995) 182 CLR 544 at 570.

At all events, s 51A of the Federal Court of Australia Act provides sufficient basis for the order sought, applying, as it does, “[i]n any proceedings for the recovery of any money”. When the applicant brought an action which included a claim for an account of profits, it brought proceedings for the recovery of money. Having done so, it became entitled (by s 51A(1)) to an order for interest “upon application, unless good cause is shown to the contrary”.

I am satisfied interest should be awarded on both bases, and that the same order is appropriate, whether it is made on the one basis or the other.  Although, strictly, interest should perhaps be calculated, in the case of the trading profit, from an intermediate starting date in 1992 to reflect the accrual of receipts over the period of trading, it is convenient and appropriate, using a broad brush, to calculate interest on both the trading profit and the capital profits from 4 January 1993.  Counsel for the respondents submitted interest should not run from earlier than May 1995, when, it was agreed, the election was made by the applicant for an account of profits.  But the claim, which was brought and heard very promptly, an interlocutory injunction being avoided, was always for damages or an account of profits.  Either remedy involves the right to claim interest, and I see no reason to deprive the applicant of a substantial part of that remedy.  As to the rate of interest, the practice of the Court, when sitting in New South Wales, is to utilize the rates prescribed under the rules of the Supreme Court of New South Wales:  Namol Pty Limited v A W Baulderstone Pty Limited (No 2) (1993) 47 FCR 388 at 389, per Davies J; Alec Finlayson Pty Limited v Armidale City Council (unreported, Burchett J, 6 March 1998); Nagy v Masters Dairy Ltd (1997) 150 ALR 301, at 317, per R D Nicholson J. That practice should be followed in this case.

Tax
It was agreed, during argument, that the tax questions which had been raised should be deferred until the bringing in of short minutes of the orders to be made pursuant to my reasons for judgment, when I shall also hear any submissions as to costs.

Order
The only order I pronounce at this stage is to direct the applicant to bring in, on a date to be fixed, short minutes of orders appropriate to be made pursuant to these reasons.

I certify that this and the preceding twenty-two (22) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Burchett

Associate:

Dated:  2 June 1998   

Counsel for the Applicant:	Mr D K Catterns QC and Ms S J Goddard
Solicitors for the Applicant:	Mallesons Stephen Jaques
Counsel for the Respondents:	Mr P G Hely QC and Mr P R Whitford
Solicitors for the Respondents:	Clayton Utz
Dates of Hearing:	7, 8, 9, 10, 11, 14, 16, 17 July 1997
Date of Judgment:	2 June 1998